Supply Chain Strategies I: Aligning Strategies; Efficiency and Cost Savings (back to catalog)

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...Inventory generally consists of safety stock and cycle stock. Cycle stock is the inventory that you plan to sell based on demand forecasts, while safety stock provides an additional buffer for excess demand or delayed shipments from your suppliers. Since your forecasted demand was 100 units every week and your safety stock was 2 weeks' supply, assume your total inventory was 100 units of cycle stock plus 200 units of safety stock, or 300 units. When you received an order for 105 units, or 5% higher than forecast, you depleted your entire cycle stock of 100 units to fill that order, and you still had demand for 5 more units. These remaining units are called forecast error, and you shipped the remaining 5 units from your safety stock.

The revised safety stock calculation is as follows:

Initial Safety Stock:200 units
  Forecast Error:- 5 units
Current Safety Stock:195 units
Then for replenishment:
  Replenishment for Forecasted Future Demand:
   (replenish cycle stock to new forecast of 105)
  +105 units
  Replenishment for Safety Stock Adjustment:   
   (to bring safety stock to new level of 210)
  +15 units
Total Replenishment Order:  120 units

From the table above, the replenishment order will be 105 units (for the new forecast) plus 15 more for the safety stock adjustment, for a total of 120. This means that a 5% increase in sales has led to a 20% increase in orders - the Bullwhip Effect! On the flip side of this, if weekly sales dropped from 100 to 95, the effect is exactly the reverse, and the subsequent replenishment order would be more than 5% lower if again safety stocks are recalculated immediately, thus creating the Bullwhip Effect on the downside also. The remedy here is to keep safety stocks steady and let them handle what might be random fluctuations in sales, and not update them unless and until there has really been a significant and persistent change in the sales rate...


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SCM102 Specifications

Title: Supply Chain Strategies I: Aligning Strategies; Efficiency and Cost Savings

4.4 / 5  (1896 ratings)

Total Reading Time: Approx. 1 - 2 hours (for average readers)

Word Count: Approx. 9,000 words


Certificate: Counts toward Fundamentals of Supply Chain Management

Datasheet:  Download


  1. Introduction to Supply Chain Strategies
  2. Functional vs. Innovative Products
  3. Efficient vs. Responsive Supply Chain Strategies
  4. Aligning Products and Strategies
  5. Product Life Cycle Revisited
  6. Improving Efficient Supply Chains
  7. Beer Game Introduction
  8. Beer Game Simulation
  9. Beer Game Results
  10. Bullwhip Effect: Importance and Causes
  11. Cause 1: Information Distortion
  12. Cause 2: Order Batching
  13. Cause 3: Promotions
  14. Cause 4: Allocation Gaming
  15. Counteracting Information Distortion: Forecasting Problems and the Hockey Stick Effect
  16. Counteracting Information Distortion: Vendor-Managed Inventory (VMI)
  17. Counteracting Information Distortion: Supplier Managed Availability (SMA)
  18. Counteracting Information Distortion: Reducing Lead Times, Reserving Capacity, and Direct Sales
  19. Counteracting Information Distortion: Keeping Safety Stocks Steady
  20. Counteracting Order Batching
  21. Counteracting Promotions
  22. Counteracting Allocation Gaming
  23. Conclusions
  24. Test Your Knowledge
  25. Feedback
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